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on Insurance Economics |
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Issue of 2006‒11‒12
three papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Cummins, J. David (Wharton School, University of Pennsylvania); Miltersen, Kristian R. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Persson, Svein-Arne (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | Interest rate guarantees seem to be included in life insurance and pension products in most countries. The exact implementations of these guarantees vary from country to country and are often linked to different distribution of investment surplus mechanisms. In this paper we first attempt to model practice in Germany, the UK, Norway, and Denmark by constructing contracts intended to capture practice in each country. All these contracts include rather sophisticated investment surplus distribution mechanisms, although they exhibit subtle differences. Common for Germany, Denmark, and Norway is the existence of a bonus account, an account where investment surplus is set aside in years with good investment returns to be used to cover the annual guarantee in years when the investment return is lower than the guarantee. The UK contracts do not include annual bonus distribution, instead they include a potential bonus distribution at maturity of the contract. <p> These contracts are then compared with universal life insurance, a popular life product in the US market, which also includes annual guarantees and investment surplus distribution, but no bonus account. The contract parameters are calibrated for each contract so that all contracts have ’fair’ prices, i.e., the theoretical market price of the contract equals the theoretical market price of all future insurance benefits at the inception of the contract. <p> For simplicity we ignore mortality factors and assume that the benefit is paid out as a lump sum in 30 years. <p> We compare the probability distribution of the future payoff from the contracts with the payoff from simply investing in the market index. Our results indicate that the payoffs from the Danish, German and UK contracts are surprisingly similar to the payoff from the market index. We are tempted to conclude that the presence of annual guarantees and sophisticated investment surplus distribution, annual or at maturity only, have virtually no impact on the probability distribution of the payoff. The Norwegian contract has lower risk than the mentioned contracts, whereas the universal life contract offers the lowest risk of all contracts. Our numerical analysis therefore indicates that the relative simple and more transparent US contract provides the insurance customer with a less risky future benefit than the more complex (and completely obscure?) European counterparts. |
| Keywords: | Interest rate guarantees; Life insurance; Pension products |
| JEL: | G22 G23 |
| Date: | 2004–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2004_018&r=ias |
| By: | Holger Strulik (University of Hannover); Jean-Robert Tyran (Department of Economics, University of Copenhagen); Paolo Vanini (University of Zurich) |
| Abstract: | We develop a simple model of short- and long-term unemployment to study how labor market institutions interact with labor market conditions and personal characteristics of the unemployed. We analyze how the decision to exit unemployment and to mitigate human capital degradation by retraining depends on education, skill degradation, age, labor market tightness, taxes, unemployment insurance benefits and welfare assistance. We extend our analysis by allowing for time-inconsistent choices and demonstrate the possibility of an unemployment trap. |
| Keywords: | unemployment; skill degradation; retraining; unemployment benefits; welfare assistance; present-biased preferences |
| JEL: | J64 J31 J38 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0618&r=ias |
| By: | Simtowe, Franklin; Zeller, Manfred |
| Abstract: | Moral hazard is widely reported as a problem in credit and insurance markets, mainly arising from information asymmetry. Although theorists have attempted to explain how group lending with joint liability can be an important tool for mitigating moral hazard among the poor, empirical studies are rare and sometimes give mixed results. In Malawi, for example, although, group lending with joint liability has been practiced for nearly four decades, the unwillingness to repay loans remains the single major cause of default. This paper examines the extent of occurrence of moral hazard and investigates its determinants of occurrence among joint liability lending programs from Malawi, using group level data from 99 farm and non-farm credit groups. Results reveal that peer selection, peer monitoring, peer pressure, dynamic incentives and variables capturing the extent of matching problems explain most of the variation in the incidence of moral hazard among credit groups. The implications are that joint liability lending institutions will continue to rely on social cohesion and dynamic incentives as a means to enhancing their performance which has a direct implication on their outreach, impact and sustainability. |
| Keywords: | moral hazard; joint liability; dynamic incentives; group lending; Malawi |
| JEL: | M21 M20 |
| Date: | 2006–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:461&r=ias |